SMAs have major advantages over high-cost managed funds.

Key take-out: Compared to managed funds, which generally charge platform, management and adviser fees, SMAs are substantially cheaper to run and allow much greater control.

Key beneficiaries: General investors. Category: Strategy.

There’s a quiet, but surprisingly powerful, revolution taking place within Australia’s investments arena that’s showing no signs of being quashed anytime soon.

The disrupter is an innovative form of financial product known as a separately managed account, or SMA, and retail investors are loving them because of their flexibility, transparency and tax advantages, their low investment entry point and their overall cost effectiveness compared with other products such as managed funds.

Another big plus for SMAs is that investors can direct their capital into different managed investment portfolios, which may be growth or income focused, or even linked to international equities, based around their preferred investment allocations and time horizons.

The proof is in the numbers too, with data from the Institute of Managed Account Professionals (IMAP) released this month showing Australian investors now have close to $31 billion in managed account products.

Investment bank Morgan Stanley has forecast that figure will double to $60bn in the next four years, driven by strong investor demand, and aided by investment products providers, fund managers, financial advisors and new technology platforms.

What are SMAs?

Like a managed fund, an SMA gives investors access to a diversified investment portfolio overseen by a professional investment manager. But unlike a managed fund, their investment isn’t pooled with money from other investors.

Through an SMA, an investor is the direct, beneficial owner of the shares and exchange-traded funds and other assets held within their account. Also unlike a managed fund, an investor can easily see exactly what shares and securities they are holding, can monitor performance on a daily basis and can exit their positions at will.

That gives total control and transparency, and there’s also a major tax advantage in SMAs because they readily overcome the problem inherent in managed funds where the capital gains tax liabilities of all unitholders are shared. In an SMA, an investor can switch between portfolios without paying any tax penalty.

The day-to-day management of investments are taken care of, with a fund manager automatically rebalancing individual portfolios based on the individual investor’s strategy.

SMAs are also accessible to most investors, with some requiring a minimum investment of just $5000, and there are no platform or advisor fees, making them much cheaper than managed funds, which typically charge both plus management fees.

The SMA evolution

The big paradox behind SMAs, of course, is that they’re not new at all. They’ve effectively been around as an investment structure since the 1990s.

IMAP chairman Toby Potter describes them as “the overnight success story that’s been around 20 years in the making”. What’s given them new impetus are what Potter calls “a number of intersecting changes”.

“As the financial advice industry has matured, advice businesses have looked for suitable vehicles which allow them to articulate different investment philosophies in a cost-effective way for clients,” he says.

In its report Managed Accounts: Evolution or Revolution?, Morgan Stanley says “the key headwind that delayed SMA adoption is SMSF growth, as they provided a tax advantaged vehicle for high net worth clients".

“But this is turning into a tailwind as a more mature SMSF segment demands the benefits of SMAs – professional management with transparency, beneficial ownership and less tax leakage.”

In addition, SMA structures have come into their own because they are readily adaptable to investment products that enable investors to choose their strategies, and to online platforms that allow investors to move in and out of holdings and to track their portfolios.

“As more and more investors take advice, this gives rise to achieving operational efficiencies in financial advice offices. They want an efficient way of implementing their decisions,” Potter adds.

Jonathan Ramsay, director of portfolio construction and consulting company InvestSense, concurs, and notes: “SMAs are a product that represent a paradigm shift in wealth management, because they are a response to market, regulatory and technology forces.”

As well as many self-managed super fund trustees wanting more flexibility and control, Ramsay says SMAs are proving popular for financial planners wanting to build scalable business models in a heavily regulated market. Advisors can easily control and manage portfolios for many different clients while allowing clients to choose additional holdings should they wish too.

Ramsay agrees that technology advances are the other key element behind the strong growth in SMAs, with the fintech platforms now available making it much easier for investors to transact and link their accounts to their super fund, pension or investment account.

“You can see what shares you own, the dividends, but importantly you can push the button and have the shares delivered to you and you can start managing yourself,” he says. “Unlike a managed fund, you can’t get locked in, because you own the stocks in the first place. The technology wrapper allows someone else to trade on your behalf.”

Transparency of holdings is a big issue for investors, and is one of the key growth drivers behind SMAs.

“We are seeing strong growth in inflows into several of our SMA portfolios as clients continue to become experienced in these products and the benefits they offer,” says Ron Hodge, chief executive of InvestSMART*. “People want the transparency; and they are questioning the value of having a managed fund and not seeing what they’re holding and having less flexibility.”

SMAs are a better mousetrap

Morgan Stanley says managed account structures such as SMAs are “a better customer mousetrap” because they meet more of their needs than managed funds.

IMPORTANT: This information has been prepared without taking into account your objectives, financial situation or needs and you should consider if the information is appropriate for you before making an investment decision. Unless otherwise specifically stated or disclosed (such as the InvestSMART Diversified Portfolios Product Disclosure Statement), neither InvestSMART Financial Services Pty Ltd nor any of its Related Companies make any recommendations as to the merits of any investment opportunity referred to in its emails or its related websites. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about the product. All indications of performance returns are historical and can not be relied upon as an indicator for future performance.